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Southwestern Energy: Outlook for 2016 and Income Sensitivities

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SWN’s earnings and cash flow guidance

Southwestern Energy (SWN) anticipates its 2016 net loss to lie in the range of $160 million–$180 million compared to a net income of $71 million in 2015. Adjusted earnings before interest, tax, depreciation and amortization (or EBITDA) is expected to lie in the range of $450 million–$500 million versus $1.4 billion in 2015.

These expectations are based on an average natural gas price of $2.35 per thousand cubic feet (or Mcf) and an average oil price of $35.00 per barrel in 2016.

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SWN’s production guidance and net income sensitivities

At these prices, Southwestern Energy’s (SWN) capital spending is primarily targeted at its existing drilled, but uncompleted, well inventory. Also, at these levels, SWN expects its 2016 production levels to lie in the range of 815 Bcfe to 535 Bcfe (billion cubic feet equivalent)—a 15% reduction at the midpoint compared to 2015 levels. For every $0.25 per Mcf increase in natural gas prices and $5 per barrel increase in oil prices, the company expects to add $185 million and $15 million in cash flows, respectively.

So, SWN needs its natural gas prices to be in the vicinity of $2.70–$3.00 per Mcf to break even at a net level. Therefore, if natural gas prices stay below the $2.35 assumed level, SWN’s ability to save up cash would be in trouble, and sub-$2 levels of natural gas prices could mean its inability to even finance its drastically lower capex. Natural gas prices traded at an average of $2.05 per Mcf so far in 1Q16.

With Southwestern Energy committed to staying away from drilling new rigs and cutting its capex by 80%, the 15% lower production guidance doesn’t come as a surprise. In comparison, its peer Chesapeake Energy (CHK) expects its production to decline in the range of 0%–5%, adjusted for asset sales. Cabot Oil and Gas (COG) and QEP Resources (QEP) expect their respective production levels to grow by 4.5% and -4% respectively, in 2016. COG, CHK, and SWN make up ~0.08% of the SPDR S&P 500 ETF (SPY).

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